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Conversation: Russia Faces Economic Challenges, Opportunities

Eugene Chausovsky: Hello, my name is Eugene Chausovsky and I'm a Eurasia analyst here at Stratfor. Joining me today is fellow Eurasia analyst, Lauren Goodrich. We'll be discussing some challenges and opportunities for Russia in the context of the crisis in Ukraine. So, Lauren, there has been a lot of negative talk, a lot of negative reporting, about the state of Russia's economy — the ruble is at an all-time low, sanctions from the Europeans have influenced the economy this year — what is the current sate of the economy and how do you see that moving forward in the next three months or so?

Lauren Goodrich: The Russian economy has certainly suffered due to the crisis in Ukraine and Western perceptions of Russia at this time. Russian growth this year is going to be flat. The World Bank says that Russia is already in recession, although Russia argues that they are just slightly above recession levels at this time. Foreign investment inside the country has dropped in half this year, capital flight will most likely reach around $100 billion. So the Russian economy is suffering due to the negative attention on Russia during the past three quarters. However, the Russian government is weathering this. They have plenty of financial reserves — in the bank they have around $650 billion at this time. They have had to use around $1.6 billion this week alone in order to stabilize the ruble. They have used about $51 billion total this year in order to stabilize the currency and they are going to have to continue spending, particularly because the Russian government is now going to be stepping in and financially assisting a lot of the big state firms and the really large energy firms that are suffering due to the sanctions from the West. So, the Russian government has the money to spend but they are going to have to spend it because the Russian economy needs it so badly.

Eugene: OK, so it sounds like what you are saying is that despite the economy suffering up until now, Russia has the tools to stem any major weakening in these next few months.

Lauren: Very much so and the Russian government has been very luck in that oil has stayed above $90 per barrel. The Russian budget was originally set at $114 per barrel oil, which is extraordinarily high for any government to rely on, and with oil currently in the nineties, the Russian government is at least lucky that oil stayed in the triple digits for the first three quarters of the year in order for them to have enough revenue for them to be able to weather the lower price for this fourth quarter. So, the Russian government is lucky that it has at least above $90 oil. That is going to help them for this fourth quarter to be able to weather the continued sanctions, the continued pressures on their economy and the need for them to spend as much money as they need to.

Eugene: In terms of the sanctions, one thing that we have been covering on the broader geopolitical climate between Russia and the Europeans is that there has not been a decrease in that relationship. The fighting that is happening right now in Eastern Ukraine, while it is continuing, has decreased in the escalation of that combat. There is a ceasefire in place and of course attacks are still continuing in some of the hotspots around Donetsk airport and other areas, but there have not been any major military moves either out of Russia or on the Ukrainian side. That is then driving the Europeans — especially Germany, France, Italy — to not want to increase sanctions on Russia at the moment. In fact, they are even talking about the possibility of easing them based off of what happens on the ground. Of course you have some countries in Europe that are opposed to this, such as Poland and the Balkan states, that want to keep the up the pressure on Russia, but that kind of drive against the Russian economy that has been really influenced by the Europeans up until now, we do see that sort of calming down in this next quarter.

Lauren: We have moved into a new era within this crisis. We are not in the combat era anymore, we are now into the negotiation phase. We have even seen the United States come out and say that they are even willing to ease sanctions on the Russians. The Russians have now turned around and said: we are willing to ease our counter-sanctions against the Europeans as well. So, there is room for negotiation and that's the era and the phase that we are now moving into, both with the Russians and the Ukrainians negotiating but also the Russians, the Europeans and the United States.

Eugene: One other interesting aspect that does not get as much coverage in the media is that while Russia has suffered economically this year there have also been some positives for Russia, namely in this economic grouping that Russia has been working on for the past several years. It has a customs union with Belarus and Kazakhstan. These countries have also only gotten closer with Russia as a result of the crisis in Ukraine. They are going to be forming the Eurasian Union, which will debut at the beginning of next year. You even have some other countries within the former Soviet space that will be joint that union next year: Armenia, Kyrgyzstan will likely join later in the year. These are countries that despite or even because of the crisis in Ukraine, want to integrate more closely with Russia, even despite its problems on the economic front.

Lauren: I agree — there are multiple levels. The crisis in Ukraine has polarized the choices for these countries, especially the former Soviet states. They now have to choose whether they want to be closer to the West or do they want to be closer to Russia. It is all about opportunities, which one is going to offer more opportunities, whether it is investment or markets or energy ties. For most of the former Soviet states, particularly the ones in Central Asia and the Caucasus, meaning Armenia, it is Russia. The West does not offer those opportunities that Russia offers them. So, for those countries because there is such a polarization between the West and Russia at this time, they are having to choose. Russia is pretty much the only choice for them.

Eugene: So on the one hand you have countries like Ukraine of course first and foremost, but also other countries like the Baltics, Moldova that are trying to get closer to the West that are very concerned about Russia's military posturing in Ukraine. There are still countries that are getting closer to Russia. And so, as we have seen, this has offered Russia some opportunities but as well as the economic challenges that we have seen. It will be interesting to see how Russia deals with that in the next few months. That is about all we have time for, Lauren, thank you very much for joining me and thank you for joining us. For more information please go to stratfor.com.